China is preparing to let its banks do something the West has been doing for years

Hotel
guides jump as they pose for pictures outside the Great Hall of
the People during the opening session of the National People's
Congress (NPC) in Beijing, China, March 5,
2016.REUTERS/Aly
Song

SHANGHAI (Reuters) - China's central bank is preparing
regulations that would allow commercial banks to swap
non-performing loans of companies for stakes in those firms, two
sources with direct knowledge of the new policy told Reuters.

The sources, who spoke on condition of anonymity, said the
release of a new document explaining the regulatory change was
imminent.

The People's Bank of China (PBOC) did not respond to requests for
comment.

On paper, the move would represent a way for indebted corporates
to reduce their leverage, reducing the cost of servicing debt and
making them more worthy of fresh credit.

It would also reduce NPL ratios at commercial banks, reducing the
cash they would need to set aside to cover losses incurred by bad
loans.

These funds could then be freed up for fresh lending for
investment in the new wave of infrastructure products and factory
upgrades the government hopes will rejuvenate the Chinese
economy.

The sources said the new regulations would be promulgated with
special approval from the State Council, China's
cabinet-equivalent body, thus skirting the need to revise the
current commercial bank law, which prohibits banks from investing
in non-financial institutions.

In the past Chinese commercial banks usually dealt with NPLs by
selling them off at a discount to state-designated asset
management companies. The AMCs would turn around and attempt to
recover the debt or resell it at a profit to distressed debt
investors.

The sources did not have further detail about how the banks would
value the new stakes, which would represent assets on their
balance sheets, or what ratio or amount of NPLs they would be
able to convert using this method.

Official data from the China Banking Regulatory Commission shows
Chinese banks held NPLs and "special mention" troubled loans in
excess of 4 trillion yuan ($614.04 billion) at the end of 2015.

(Reporting by the Hong Kong Newsroom; Writing by Pete Sweeney and
Shu Zhang; Editing by Sam Holmes and Neil Fullick)

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